Yes, Fractional Reserve Banking Again

[Zippyjuan]

Reserve requirements apply to ALL deposits. Not just demand accounts. You are correct that one of the reasons for them was to minimize the risk of runs on banks.

http://www.federalreserve.gov/monetarypolicy/0693lead.pdf

Laws requiring banks and other depository institutions
to hold a certain fraction of their deposits in
reserve, in very safe, secure assets, have been a part
of our nation’s banking history for many years. The
rationale for these requirements has changed over
time, however, as the country’s financial system
has evolved and as knowledge about how reserve
requirements affect this system has grown. Before
the establishment of the Federal Reserve System,
reserve requirements were thought to help ensure
the liquidity of bank notes and deposits, particularly
during times of financial strains. As bank runs
and financial panics continued periodically to
plague the banking system despite the presence of
reserve requirements, it became apparent that
these requirements really had limited usefulness as
a guarantor of liquidity.

 

[TheTexan]

Reserve requirements apply to ALL deposits. Not just demand accounts. You are correct that one of the reasons for them was to minimize the risk of runs on banks.

http://www.federalreserve.gov/monetarypolicy/0693lead.pdf

http://www.amosweb.com/cgi-bin/awb_nav.pl?s=wpd&c=dsp&k=reserve+requirements

The reserve requirement for time deposits has been 0 percent since 1980

ETA:

More info and better source here:
http://www.federalreserve.gov/monetarypolicy/reservereq.htm#table1

 

[TheTexan]

Zippy you work for the bankers you're supposed to know this stuff, you're off your game bro

 

[hazek]

Banks can't lend money they don't have- that is what reserve requirements are all about. The Fed can- but other banks can't.

Artificial liquidity is the liquidity that exists because of an environment created through government decree.

For instance people today are willing to lend money to banks for dirt cheap and continuously only because they are shielded from any risks incurred through lending by the FDIC. Were there no FDIC people would be a lot more wary of demand deposit accounts as they are structured today drying up the liquidity of debt significantly.

 

[hazek]

Money can't exist in two places at the same time. It can't exist in a depositor's account, and also loaned out to someone else.

And it doesn't in today's fractional reserve banking.

 

[Danan]

You know that they do this. I know that they do this. Does Bob Hillbilly down the street know this? Good chance he doesn't.

He wouldn't care since the FDIC removes his personal risk anyway, as far as he is concerned. Public deposit insurance is probably one of the most harmful policies ever adopted.

 

[cubical]

And it doesn't in today's fractional reserve banking.

So if money isn't created by making a liability against an asset on bank balance sheets, how is the money supply constantly being expanded(even before the fed was acting)?

 

[hazek]

So if money isn't created by making a liability against an asset on bank balance sheets, how is the money supply constantly being expanded(even before the fed was acting)?

Because debt is made so liquid it itself is exchanged as if it's money.

 

[cubical]

Because debt is made so liquid it itself is exchanged as if it's money.

If debt is treated as money, then it is the same thing as saying money can be in two places at once.

 

[matt0611]

If debt is treated as money, then it is the same thing as saying money can be in two places at once.

Yup. Exactly.

Which is why fractional reserve is inflationary and inherently fraudulent. But we've been around this merry-go-round before on these forums many times before haven't we?

 

[hazek]

If debt is treated as money, then it is the same thing as saying money can be in two places at once.

No? Money is one thing. And debt i.e. a claim on money is another thing. And debt, i.e. a claim on money, acting as money is a third.

Money cannot be in two places at once.


I don't know, this is highly abstract so I'm pretty sure it's a bit hard to wrap one's head around.. but let's see if we can illustrate this with an analogy.

Suppose Bob has a gold coin and he gives it to Charlie for safe keeping. Bob now holds an IOU from Charlie and Charlie holds the coin. If Charlie now lends the coin to someone else he to now holds an IOU. Since Bob also holds an IOU on the same coin, is now the coin in two places at once? Of course not. However the supply of overall money might increase if other people start accepting Bob's IOU as if it was the actual coin. Now why would other people do this? Well they would do this because Uncle Sam has said he will guarantee all IOUs issued by Charlie. And bam, the IOUs Charlie issues become so liquid they start to act in the market as if they're money itself even though they're just.. well IOUs.

Are you now better able to understand what's going on?

 

[hazek]

Yup. Exactly.

Which is why fractional reserve is inflationary and inherently fraudulent. But we've been around this merry-go-round before on these forums many times before haven't we?

As I've explained above, this is factually incorrect.

 

[matt0611]

As I've explained above, this is factually incorrect.

What is factually incorrect?

That everyone's demand accounts can be drawn from on demand at any time?

 

[TheGrinch]

No? Money is one thing. And debt i.e. a claim on money is another thing. And debt, i.e. a claim on money, acting as money is a third.

Money cannot be in two places at once.


I don't know, this is highly abstract so I'm pretty sure it's a bit hard to wrap one's head around.. but let's see if we can illustrate this with an analogy.

Suppose Bob has a gold coin and he gives it to Charlie for safe keeping. Bob now holds an IOU from Charlie and Charlie holds the coin. If Charlie now lends the coin to someone else he to now holds an IOU. Since Bob also holds an IOU on the same coin, is now the coin in two places at once? Of course not. However the supply of overall money might increase if other people start accepting Bob's IOU as if it was the actual coin. Now why would other people do this? Well they would do this because Uncle Sam has said he will guarantee all IOUs issued by Charlie. And bam, the IOUs Charlie issues become so liquid they start to act in the market as if they're money itself even though they're just.. well IOUs.

Are you now better able to understand what's going on?

No, see, if the bank was actually lending the money they take in, then yes, the money couldn't be in 2 places at once. Full reserve banking is more akin to what you're talking about (though with less restriction of course), that they'd only be able to lend money they've taken in or already have.

Through fractional reserve banking, they only have to have 10% of what they lend out on reserves, so in essence, when they give you a loon, they're not loaning you anyone's money at all, they're just adding credit to your bank account, in essence creating money out of thin air to be repaid.

The federal reserve exists (aside from other reasons) for the purpose of influxing cash if there's a run, which would otherwise reveal the scam for what it was. It is not based on cash on hand, it's based on them being sanctioned to give you loans on money they don't have, which creates money.

 

[cubical]

No? Money is one thing. And debt i.e. a claim on money is another thing. And debt, i.e. a claim on money, acting as money is a third.

Money cannot be in two places at once.


I don't know, this is highly abstract so I'm pretty sure it's a bit hard to wrap one's head around.. but let's see if we can illustrate this with an analogy.

Suppose Bob has a gold coin and he gives it to Charlie for safe keeping. Bob now holds an IOU from Charlie and Charlie holds the coin. If Charlie now lends the coin to someone else he to now holds an IOU. Since Bob also holds an IOU on the same coin, is now the coin in two places at once? Of course not. However the supply of overall money might increase if other people start accepting Bob's IOU as if it was the actual coin. Now why would other people do this? Well they would do this because Uncle Sam has said he will guarantee all IOUs issued by Charlie. And bam, the IOUs Charlie issues become so liquid they start to act in the market as if they're money itself even though they're just.. well IOUs.

Are you now better able to understand what's going on?

Yes, I already knew that was what is going on. I am saying debt is treated like money and in the real world there is no difference. How are you defining money, since there is nothing different between a "base money" dollar and a dollar created off some loan that is an asset on a bank's balance sheet.

If we were on some sort of a gold standard there might be a difference, but not now.

 

[hazek]

Yes, I already knew that was what is going on. I am saying debt is treated like money and in the real world there is no difference. How are you defining money, since there is nothing different between a "base money" dollar and a dollar created off some loan that is an asset on a bank's balance sheet.

If we were on some sort of a gold standard there might be a difference, but not now.

There is a difference however. One is a sterile asset unencumbered by any counterparty risk and the other has counterparty risk. I mean I get what you're saying, they do act similar or even exactly the same but they are not and it's an important distinction.

Why is it important? Because we need to be accurate if we want to accurately understand the actual problem and ever have hope in solving it. Fractional reserve banking does not and never did create money out of thin air, this is a myth. Fractional reserve banking does however create mountains of debt, some of it so liquid it actually acts as money and gives the illusion money was created out of thin air.

I know many will argue that there's no difference but there is a difference. You merely need to read your demand deposit contract's fine print to see it, they're not hiding what they do and they aren't lying to you about the fact that the vast majority of your deposit is actually lent out and may be lost.

 

[hazek]

No, see, if the bank was actually lending the money they take in, then yes, the money couldn't be in 2 places at once. Full reserve banking is more akin to what you're talking about (though with less restriction of course), that they'd only be able to lend money they've taken in or already have.

Through fractional reserve banking, they only have to have 10% of what they lend out on reserves, so in essence, when they give you a loon, they're not loaning you anyone's money at all, they're just adding credit to your bank account, in essence creating money out of thin air to be repaid.

The federal reserve exists (aside from other reasons) for the purpose of influxing cash if there's a run, which would otherwise reveal the scam for what it was. It is not based on cash on hand, it's based on them being sanctioned to give you loans on money they don't have, which creates money.

This is factually incorrect.

What actually happens is that they loan out say 90% of the money that Bob deposited and Bob now holds an IOU while he mistakenly thinks (due to his own fault of not carefully reading his demand deposit account contract) he still holds his money. And now Charlie (who borrowed those 90%) deposits his loaned actual money in another bank (or the same bank) that bank can again loan out 90% of 90% of Bob's money and now Charlie holds an IOU while he mistakenly thinks (due to his own fault of not carefully reading his demand deposit account contract) he still holds his money. And this can repeat until out of the original deposit by Bob there's 9 times that amount of debt plus the original deposit.

As you can see no money was created, only highly liquid debt was created that now most people treat as money. -> The root of the problem.

Basically you have it backwards. The lender holds the created "money", not the borrower. And it's not really money but it is IOUs. Hence money = debt.